Be Wary Of General Dynamics (NYSE:GD) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think General Dynamics (NYSE:GD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for General Dynamics:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = US$4.5b ÷ (US$57b - US$20b) (Based on the trailing twelve months to September 2024).

So, General Dynamics has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Aerospace & Defense industry average of 9.1% it's much better.

See our latest analysis for General Dynamics

Above you can see how the current ROCE for General Dynamics compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering General Dynamics for free.

So How Is General Dynamics' ROCE Trending?

In terms of General Dynamics' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 12% from 15% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

What We Can Learn From General Dynamics' ROCE

While returns have fallen for General Dynamics in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 71% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you're still interested in General Dynamics it's worth checking out our FREE intrinsic value approximation for GD to see if it's trading at an attractive price in other respects.

While General Dynamics may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.